| LastUpdated 8/12/2009 9:16:46 AM
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Traders Look to Fed Announcement For More Clarity on Economic Outlook
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The major U.S. index futures are pointing to a lower opening on Wednesday, with sentiment likely to remain guarded until the FOMC releases its post-meeting policy statement. If the Fed’s commentary reinforces the theme of “an economic recovery in the works”, market participants may be encouraged to take positions on hopes of participating in a potential market upside. An economic report released earlier in the day showed that exports rose for the second straight month, which is an encouraging sign from the perspective of a global economic recovery.
Oil may see some volatility amid the release of the weekly inventory report, while at the same time, it is expected to receive some support from the IEA’s upwardly revised forecast for global oil demand.
U.S. stocks opened Tuesday’s session lower and saw further losses in the morning, as traders expressed apprehension ahead of a deluge of data and the FOMC announcement. Although the major averages snapped back some of their losses, they ended the session notably lower.
The Dow Industrials ended down 96.50 points or 1.03% at 9,241, the Nasdaq Composite Index fell 22.51 points or 1.13% to 1,970 and the S&P 500 Index closed at 994, representing a decline of 12.75 points or 1.27%.
Twenty-six of the thirty Dow components ended the session lower, with Bank of America (BAC) (down 4.98%), General Electric (GE) (down 3.98%), JP Morgan Chase (JPM) (down 3.40%), Travelers Co. (TRV) (down 3.21%), Cisco Systems (CSCO) (down 2.17%) and American Express (AXP) (down 2.57%) leading the declines. DuPont (DD) rose 1.85%.
Among the sector indexes, the NYSE Arca Airline Index fell 1.22% and the Philadelphia Housing Sector Index declined 1.05%. The NYSE Arca Oil Index and the Philadelphia Oil Service Index moved down 1.32% and 2.19%, respectively, while the NYSE Arca Gold Bugs Index receded 1.85%. The NYSE Arca Broker/Dealer Index slipped 1.87% compared to a 4.35% decline by the KBW Bank Index.
The Philadelphia Semiconductor Index lost 1.43% and the NYSE Arca Software Index fell 1.04%. The NYSE Arca Networking Index and the NYSE Arca Internet Index slipped 1.57% and 1.08%, respectively.
A consolidation phase is underway. Cantor Fitzgerald analyst Marc Pado is of the view that the phase may persist until the market takes another leap, heading into the fourth quarter. The Nasdaq Composite is at a crucial juncture, as it is approaching a gap support of 1,949.
On the economic front, the Labor Department’s non-farm productivity report showed that productivity rose 6.6% in the second quarter. The rate of decline in output slowed to 1.7% following an 8.8% drop in the first quarter, while employee hours declined 7.6% compared with a 9% drop in the previous quarter. Unit labor costs declined 5.8%, a much steeper decline than the 2.5% drop estimated by economists.
Meanwhile, the Commerce Department said wholesale inventories declined by a bigger-than-expected 1.7% month-over-month in June. The previous month’s numbers were revised down to show a 1.2% drop. However, wholesales rose 0.4%, resulting in an inventory-to-sales ratio of 1.26, the lowest level since October 2008.
The results of the Treasury’s 3-year note auction was encouraging, with the bid-to-cover ratio at a decent 2.89 to 1 and the yield at 1.780%.
FOMC Meeting – Non-event?
The Federal Reserve Open Market Committee is scheduled to make an announcement regarding the near-term direction of monetary policy at 2:15 PM ET. In June, the FOMC decided along the expected lines, opting to hold interest rates unchanged at 0%-0.25%. The central bank did not make any changes to its qualitative easing measures, instead suggesting that as previously announced, it will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. The Fed also said at that time it will be buying up to $300 billion of Treasury securities by autumn.
Although rates are likely to remain stuck at current levels, the central bank could announce a change in the schedule of Treasury purchases. Danske Bank is of the view that the Fed will keep its schedule unchanged, although it may keep it open for possible future changes. The FOMC statement is likely to acknowledge the improvement in recent economic data points, while also referring to inflationary pressures that are remaining largely subdued. Consequently, the central bank will most likely say that the fed funds rate will be kept exceptionally low for an extended period.
Currency, Commodity Futures
Crude oil futures are moving up $0.22 to $69.67 a barrel after receding $1.15 to $69.45 a barrel on Tuesday. The commodity may see some strength following an upward revision to IEA’s global oil demand forecast for 2009 and 2010.
Gold futures, which rose $0.70 to $947.60 an ounce on Tuesday, are currently trading down $1.70 to $945.90 an ounce. Gold has been lingering below $950 an ounce in recent sessions, with the weakness mainly due to poor investment demand.
On the currency front, the U.S. dollar is trading down at 95.786 yen after weakening to 95.995 yen at the close of New York trading on Tuesday. Against the euro, the dollar is valued at $1.4168.
Asia
After showing strength in recent sessions, the major Asian markets closed mostly lower on Wednesday. Japan’s Nikkei 225 average opened lower and languished below the unchanged line throughout the session. At the close of trading, the index was down 150.46 points or 1.42% at 10,435.
On the economic front, the Japanese Cabinet Office reported that Japan’s domestic corporate goods price index rose 0.4% month-over-month in July following a revised decline of 0.4% in June, with the monthly wholesale price inflation remaining positive for the first time in 11 months. Rising oil prices pushed petroleum and coal products prices, which climbed 7.5% and contributed 0.39 percentage points to the index. Public utility prices showed an increase. However, on an annual basis, prices fell 5.9% in July, a steeper decline than the 5.1% drop in the previous month.
Australia’s All Ordinaries opened lower, but it recouped its losses by late morning trading only to trade back and forth across the unchanged line in a narrow range in the mid-session. However, the index advanced in the afternoon to close up 11.50 points or 0.27% at 4,346. Healthcare and financial stocks led the markets higher, while energy stocks came under selling pressure.
Europe
The major European markets ignored some early weakness and are moving to the upside after seeing weakness for the past two sessions. The French CAC Index and the German DAX Index are rising 0.40% and 0.61%, respectively, while the U.K.’s FTSE 100 Index is gaining 0.29%.
In corporate news, miner BHP Billiton (BHP) reported that its pre-tax profits for the year ended June fell 15% to $11.6 billion from $23.5 billion in the year-ago period. Net income, adjusted for one-time items, fell to $4.67 billion. Sales fell 16% to $50.2 billion.
British engineering company Balfour Beatty said its pre-tax profits for the first-half rose 14% to 108 million pounds. The company raised its dividend by 8% to 5.5 pence.
On the economic front, the French National Institute for Statistics and Economic Studies reported that French consumer prices fell 0.7% in June compared to a year earlier. Economists had expected a 0.8% decline. On a monthly basis, consumer prices were down 0.4%.
The U.K.’s Office for National Statistics showed that the number of people claiming jobseeker's allowance benefits in the U.K. increased 24,900 to 1.58 million in July. Economists had expected an increase of 28,000 for July. The claimant count rate was 4.9% of the workforce in July versus 4.8% in June. The rate came in line with economists' expectations.
The Bank of England said in its latest quarterly Inflation report that consumer price inflation is likely to drop further below target in the coming months. Downward pressure from the margin of spare capacity signals inflation is more likely to stay below target in the medium term than above, the bank said. This is based on the assumption that the Bank Rate moves in line with market rates and asset purchases using central bank reserves reach 175 billion pounds. However, the central bank finds significant risks to the inflation outlook in both directions.
Eurozone industrial production decreased 17% year-over-year in June compared with the revised 17.6% drop in May, according to a report released by Eurostat. Economists were looking for a decline of 16.4%.
U.S. Economic Reports
The Commerce Department said the trade deficit for June was $27 billion, wider than the deficit of $26 million in May. Economists estimated that the trade gap to have widened to $28.6 billion in the month.
In June, exports increased $2.4 billion to $125.8 billion and imports rose $3.5 billion to $152.8 billion. The goods deficit climbed $1.2 billion to $38.4 billion and the services surplus rose $0.1 billion to $11.4 billion.
The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended August 7th at 10:30 AM ET.
The oil inventory report for the week ended July 31st showed that crude oil stockpiles rose by 1.7 million barrels to 349.5 million barrels and remained above the upper half of the average range.
However, gasoline and distillate fuel inventories declined by 0.2 million barrels and 1.1 million barrels, respectively in the week ended July 31st. Notwithstanding the decline, gasoline inventories were in the upper half of the average range and distillate inventories were above the upper half of the average range. Refinery capacity utilization averaged 85.7% over the four weeks ended July 31st compared to 86.3% in the previous week.
The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $180 billion for July.
Earnings
Sara Lee (SLE) reported a fourth quarter loss of 2 cents per share compared to a loss of 95 cents per share last year. On an adjusted basis, the company reported earnings of 29 cents per share. Revenues were down 10% to $3.16 billion. The consensus estimates called for earnings of 24 cents per share on revenues of $3.27 billion.
Macy’s (M) said its second quarter earnings were 2 cents per share compared to 17 cents per share last year. The company’s adjusted earnings were 20 cents per share compared to the 15 cents per share consensus estimate. Revenues fell to $5.16 billion, missing the consensus estimate of $5.19 million.
Stocks in Focus
Bob Evans Farm (BOBE) could trend lower after it said first quarter sales fell 2.5% to $429.5 million, trailing the consensus estimate of $435.8 million. The company’s net income rose to 52 cents per share from the year-ago’s 45 cents per share, while analysts expected earnings of 52 cents per share. The company also said it is suspending its share repurchase program until 2010.
Cree, Inc. (CREE) is likely to gain ground after it reported that its fourth quarter earnings rose to 11 cents per share from 9 cents per share last year. On an adjusted basis, the company reported earnings of 18 cents per share. Revenues climbed 9% to $148.1 million. Analysts estimated earnings of 17 cents per share on revenues of $146.5 million. The company guided first quarter adjusted earnings to 21-23 cents per share on revenues of $160 million to $166 million. The consensus estimates call for earnings of 17 cents per share on revenues of $151 million.
Applied Materials (AMAT) is also likely to move to the upside after it broke even results on an adjusted per share basis, while analysts expected a loss of 8 cents per share. Revenues fell to $1.13 billion from last year’s $1.85 billion, but still beat the $958 million consensus estimate.
Lionsgate (LGF) may be in focus after it announced that it has reached a multi-year agreement with Coinstar’s (CSTR) subsidiary Redbox to supply DVDs at more than 15,000 redbox DVD rental locations.
Ball Corp. (BLL) is likely to react to its announcement that it has priced an underwritten public offering of $375 million in aggregate principal amount of 7.125% senior notes due 2016 and $325 million in aggregate principal amount of 7.375% senior notes due 2019 for a total of $700 million in aggregate principal amount.
Meanwhile, Brunswick (BC) may also be in focus after it announced that it has priced an offering of $350 million aggregate principal amount of 11.25% senior secured notes due 2016 at an issue price of 97.036%. The company also said it has amended its revolving credit facility, with the amendment helping to increase the permitted secured debt related to its refinancing of its 2013 notes.
Schering-Plough (SGP) could move in reaction to its announcement that it has settled its patent litigation with Orchid Chemicals and Pharmaceuticals over the latter’s intention to make a generic version of its allergy drug Clarinex. The agreement allows Orchid to manufacture orally disintegrating RediTabs in the U.S. on January 1st, 2012 and Clarinex 5 mg tablets on July 1st, 2009. With this settlement, Schering-Plough has ended all pending litigations against several drug makers that had sought to manufacture generic brands of Clarinex.
TRW Automotive Holdings (TRW) is likely to see some weakness after it announced that it has priced its public offering of 14 million shares at $17.50 per share. The company expects to generate net proceeds of $234.09 million from the offering.
BRE Properties (BRE) is expected to react to its announcement that it has appointed John Schissel as its chief financial officer, effective October 5th, 2009. Wyeth (WYE) may be in focus after it announced that the action date for the FDA’s review of the BLA for its vaccine Prevnar 13 has been extended by 3 months to December 30th, 2009. The delay is due to the fact that the FDA had deemed the additional information about analysis and specifications on the physical and chemical properties as a major amendment.
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